Cyprus IP Box Tax regime

Introduction

As of the 1st of July 2016, a new Intellectual Property (IP) tax regime (IP Box) is applicable in Cyprus. The Cyprus IP tax legislation is now fully compliant with the OECD and it  was amended as per the recommendation of the Base Erosion and Profit Shifting (BEPS) action 5 on Harmful Tax Practices.

As will be demonstrated below, the Cyprus IP regime provides great incentives for IP companies to transfer their seat, offices and personnel in Cyprus. Based on the IP Box 80% of the profits qualifying for the regime are exempt from tax and therefore, with an applicable corporate tax rate of 12.5% this can result in an effective tax rate of 2.5% or less. Furthermore, other incentives also exist rendering Cyprus an attractive jurisdiction for the establishment of fully-fledged offices for IP companies such as lower cost structure (labour and operational costs), strategic location in the middle of three continents, member of the EU, English are widely spoken and the availability of highly skilled workforce.

Executive summary

– Effective tax rate of 2.5% or less on profits from qualifying assets,

– Qualifying Assets:

(a) patents,

(b) computer software, and

(c) other intellectual property which is legally protected

-Qualifying Profits

The level of profits eligible for the 80% tax exemption will depend on the level of R&D expenditure carried out by the taxpayer to develop the qualifying asset.

Nexus approach explained

The new Cyprus IP regime follows the nexus approach. But what this nexus approach really is? The word ‘nexus’ indicates a connection linking two or more things. When referring to IP assets the nexus approach requires a link between the income taking advantage of the relevant IP rules, and the extent to which the taxpayer has actually performed the underlying research and development (R&D) that generated the IP asset. Therefore, a direct link between the qualifying income and own qualifying expenses is essential for the IP to qualify.

Cyprus IP regime

Under the new IP Box, qualifying intangible asset is an asset which has been acquired, developed or exploited by a person within the course of carrying out their business which is the result of research and development activities. Such assets specifically comprise of

(a) patents,

(b) computer software, and

(c) other intellectual property which is legally protected and comprises of utility models, IP assets, which provide protection to plants and genetic material, orphan drug destinations and extensions of protection for patterns or non-obvious, useful and novel (which are certified as such by an appropriate authority) where the person utilizing such does not generate annual gross revenues in excess of Euro 7.5 million from all intangible assets (or Euro 50 million for groups).

Qualifying intangible assets specifically exclude trademarks, business names, brands image rights and other IP rights used for the marketing of products and services.

Persons that may benefit from the Cyprus IP regime include Cyprus tax resident taxpayers, tax resident permanent establishments (PEs) of non-tax resident persons are well as foreign PEs that are subject to tax in Cyprus.

Moreover, the new regime introduced the nexus fraction for the purposes of determining the amount of qualifying profits used to determine the relevant tax deduction. For the calculation of the qualifying profits the overall income (being the gross income derived from qualifying intangible assets minus any direct costs), the qualifying expenditure, uplift expenditure and overall expenditure are taken into consideration. The nexus approach is additive in that the calculation requires that expenditure includes all expenses incurred by the taxpayer over the life of the IP asset.

Why Cyprus

As explained above the Cyprus IP regime gives considerable benefits to IP companies wishing to transfer their offices and personnel in Cyprus. Apart from such tax benefits, other advantages also exist rendering Cyprus an attractive jurisdiction for the establishment of fully-fledged offices.

A number of incentives are available for managers, higher officers and employees of a company wishing to re-locate on the island. Apart from obtaining the tax resident non-domiciled status (with exemptions from the Special Defence Contribution tax), expatriate relief is also available, whereby 50% of the gross emoluments (exceeding €100.000) are allowed to be deducted from taxable income for individuals that were not tax residents of Cyprus prior to the commencement of their employment in Cyprus. This deduction is available for a period of ten (10) years, commencing from the date of employment.

The Cyprus IP Box

The amount of qualifying profit can be derived through the application of the following formula:

QP = OI x (QE + UE)/OE

The terms explained:

QP – Qualifying profits are calculated based on the “nexus approach”. More specifically, the level of profits eligible for the 80% tax exemption will depend on the level of R&D expenditure carried out by the taxpayer to develop the qualifying asset.

OI – Overall income derived from qualifying assets is defined as the gross profit from the assets (i.e. gross income less any direct expenditure). Overall income includes, but is not limited to: ·

• Royalties or any other amounts relating to the use of qualifying assets
• Any amount for the grant of a license for the exploitation of the qualifying assets
• Any amount relating to the insurance or compensation of the qualifying assets;
• Trading income from the disposal of the qualifying asset
• Embedded income on qualifying assets, which is derived from the sale of goods, the provision of services or use of any processes that are directly related to the qualifying assets.

Capital gains arising from the disposal of a qualifying asset under the new IP regime are not included in qualifying profits and are fully exempt from income tax.

QE – Qualifying expenditure relating to a qualifying asset is the sum of all R&D expenditure incurred in any tax year wholly and exclusively for the development, enhancement or creation of a qualifying asset and that is directly related to that asset.

Qualifying expenditure includes, but is not limited to:

• Salary and wages
• Direct costs
• General expenses associated with R&D activities
• Commission expenditure associated with R&D activities
• R&D expenditure outsourced to unrelated parties

Qualifying expenditure does not include:

• The acquisition cost of a specific intangible asset
• Interest paid or payable
• Expenditure relating to the acquisition or construction of immovable property that has been paid or is payable directly or indirectly to a related person carrying out R&D, regardless of whether the amounts relate to a cost sharing agreement

Capital allowances on intangible assets are also available and will be tax deductible over the useful economic life of the asset, as determined by generally acceptable accounting principles (up to a maximum useful life of 20)

(UE) – Uplift expenditure of a qualified asset is the lower of (i) 30% of the qualifying expenditure, and (ii) the total acquisition cost of the qualifying asset and any R&D costs outsourced to related parties

(OE) – Overall expenditure of a qualifying asset is the sum of (i) qualifying expenditure, and (ii) the total acquisition cost of the qualifying asset and any R&D costs outsourced to related parties incurred in any tax year.

How can we help

We can assist with:

• Provide free tax advice on appropriate structure
• Advice on qualifying assets and expenditure
• Assist on registration of Intellectual Property in Cyprus and internationally
• Assist on relocation of staff in Cyprus
• Advice in respect of any restructuring of your Company